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A Market Ripe for Picking
When a homeowner realizes they are having trouble meeting their mortgage commitments, they will try about anything to solve that problem. Some attempt to ‘refinance,’ meaning they apply for a new loan on their home large enough to pay their back payments (called ‘reinstatement’), as well as associated foreclosure attorney’s fees,bank fees, and so forth. This will work if the owner has enough equity in the home, in conjunction with enough income to make the new payments. Unfortunately, this is often difficult, as payments on this type of refinanced mortgage are usually higher, with higher interest rates to boot (one reason banks are willing to refinance in this risky situation is that they hope to make more money from their loans). Refinancing, however, will not work for many. It is not a viable option for foreclosure-threatened homeowners who have a poor credit history, lack of sufficient equity, or are unemployed.
Other homeowners will attempt to borrow money from friends or relatives. As you might guess, however, this is often unsuccessful. Most relatives do not have enough money to be of assistance; those who do are unlikely to loan cash to individuals with a history of failing to meet their financial obligations.
Some foreclosure-threatened owners will resort to bankruptcy in an effort to save their home. If successful, bankruptcy declarations will stop the foreclosure proceedings. Even so, follow-up hearings of the bankruptcy court seek to establish when the owner can begin making regular mortgage payments again. This same court will also set a date following which reinstatement payments must begin. In other words, declaring bankruptcy only postpones the inevitable — homeowners must still pay their mortgage and back payments. If and when the owner fails to meet these dual payments (which is a frequent occurrence), lending banks will petition the court to have the property released from bankruptcy protection so they can foreclose. Long story short — bankruptcy is far from the panacea some make it out to be.
A percentage of homeowners will try to sell their property before actual foreclosure and auction. But because most of these owners are far less than real estate professionals, their efforts are often unsuccessful. Frantic, unprofessional homeowners have little idea as to where or how to find a buyer. Because time is pressing once foreclosure proceedings begin, there is usually insufficient time to conduct adequate marketing of the home. Further, the price they’re asking for may be well out of the market range. Finally, if the property is in need of rehab (which is often so), finding a buyer on short notice can be even tougher.
Lastly, some owners of pre-foreclosed properties are simply in flat denial of the situation. They do nothing about the impending catastrophe and are eventually forced to abandon their house for auction.
Now you have an idea as to why this market is so prolific, and why foreclosurethreatened homeowners are ready for someone to help them. You also have an idea as to why savvy investors concentrate on this market. It is ripe for the picking.
How to Work Them
Now let’s get into the particulars of working pre-foreclosures: Mrs. Davis has not paid her mortgage in at least three months. When this occurs, banks commonly send the homeowner a “Notice of Default.” This letter informs Mrs. Davis that she is in default of her mortgage and that the foreclosure proceedings will begin. It usually takes 6-12 months after the Notice of Default for the property to actually go up for auction at a Sheriff’s Sale, though I have seen cases which took even longer. Because each state has different laws regarding foreclosure proceedings, it is important to confer with a real estate attorney about foreclosure laws in your state.
Virtually all homeowners who receive Notices of Default are worthy of your attention and in need of your help. Why? If they lose their home and it goes up for auction at a Sheriff’s Sale, their credit will be ruined and they will be unable to buy another home for 10 years. So don’t you think these homeowners want to hear from you? You better believe it! Even so, pre-foreclosure homeowners who have substantial equity in their home are even more worthy of your attention and more in need of your help than others. How so? Mr. Davis has paid $30,000 and yet owes $40,000 on his mortgage. Upon inspecting the property, you believe its fair market value is currently $100,000. So while Mr. Davis stands to lose his home, $30,000 worth of investment, his good credit, and the ability to purchase another home, you stand to gain $60,000. In other words, this is one homeowner you want to contact!
Courthouse Records
The next question you should be asking is, “How do I locate these homeowners who have received Notices of Default?” It so happens that every time a Notice of Default is served to a homeowner, it is recorded in their county courthouse. The good news to you and me is that all courthouse information is public record and can be accessed without violating any privacy laws. To accumulate a list of such homeowners, all you need to do is go to the county courthouse in the county which you want to buy homes. Ask to speak to the person in charge of compiling Notice of Default lists, then request a monthly list of all Notices of Default and judgments entered on properties in default. Your aim is to acquire a new list every month. This is your POWER LIST! If they have no list compiled, then ask the person there about helping you compile a list yourself. Or ask the person working there if they can refer you to any company that compiles this data and sells it. My practice is to then contact these homeowners through a Pre- Foreclosure Letter followed by a personal phone call.
When you call, it is important to be polite and professional, saying something like this: “Hello Mr. Davis, my name is John Smith with Smith Investments. The reason for my call is that while I was in the courthouse today I noticed that you are in default of your mortgage. I am very sorry to hear this. I don’t want to take much of your time, but I believe I can help you.” The homeowner will likely say, “How are you going to help me?” I respond, “Well, Mr. Davis, do you know that if the bank forecloses on your property, you will have a foreclosure recorded on your credit, and chances are, you will not be able to buy another home, not to mention receive any credit cards or get approved for any type of loan for 10 years? Did you realize that?” Mr. Davis will probably answer, “Oh, I wouldn’t want that to happen. What can I do to prevent this?” I add, “I am in the business of helping homeowners such as yourself, who are losing their homes. The best way I can help you is by purchasing your home. Think about it, it’s a win-win situation. First, you WILL save your credit. Second, you will walk away with cash in your pocket.”
If the homeowner likes what you’re saying, tell him, “Mr. Davis, before I start making any promises, I would like to stop by your home to speak with you and to view your property. You need to understand that though I would love to help you, I must be very selective with the houses I buy.” You relay this to homeowners so that they know that no deal is certain. They need to know that you don’t need them — they NEED you! They are the ones losing their home, their monetary investment, and their credit. Remember, you are the professional. When you make homeowners feel like they need you, they’ll sell you their home for practically nothing.
I remember one owner I was working with who was losing her house to foreclosure. She owed about $95,000 to the bank. She agreed to sell me her house for $100,000; $95,000 of which went to pay off the mortgage balance, the remaining $5000 went to her. She was so happy; the only thing she wanted was enough money for moving expenses. After investing about $22,000 in repairs, I sold the house for $182,000!
When speaking with a homeowner over the phone, there are key questions you should ask before seeing the property:
1. What is the balance on your mortgage?
2. How many payments are you behind?
3. Are your taxes included in your mortgage payment?
4. If not, are you behind your taxes?
5. Have you received a Notice for a Sheriff’s Sale?
6. What are homes in your area selling for?
Your basic objective is to determine if there is enough equity in the property to make it profitable for you. You are looking for at least 40% equity. Equity is key to this aspect of the business. If there is no equity in the property, just move on to the next project.
As mentioned in your phone conversation, personally meeting the homeowner also gives you the opportunity to inspect the entire property. As you walk through, take a lot of notes as to what needs to be repaired in order to put the property in marketable condition. During your inspection, point out to the owner all the negative things about property. Never show any emotions. Never let them know you love the property! If they discover you like the property, they will expect more money from you.
If your verbal interaction with the homeowner, in conjunction with your physical exam of the place, indicate that the property would be profitable for you to pursue, it is always a good idea to ask the owner to sign an “Authorization to Release Mortgage Information.” This little form will allow you to contact their mortgage company, requesting the specific and actual records pertaining to the mortgage on this real estate. Though it is nice to take people at their word, some folks are simply less than accurate when recalling the financial numbers associated with their house payments, property taxes, and equity. Seeing as this is your investment business, IT IS YOUR BUSINESS TO KNOW. You will find a mortgage information release form on the next page.
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